Beneficial Ownership and International Claims for Economic Damage: Occidental Petroleum v. Ecuador and Restoring Limits to Investor-State Arbitral Tribunals’ Jurisdiction Ratione Personae

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On 2 November 2015, the ICSID ad hoc Committee composed of Prof. Juan Fernandez-Armesto (Committee President), Justice Florentino Feliciano, and Mr. Rodrigo Oreamuno in Occidental Petroleum Corporation v. The Republic of Ecuador (ICSID Case No. ARB/06/11) partially annulled the massive US $1.769 Billion award of damages issued on 5 October 2012 by the majority of the arbitral tribunal (Mr. Yves Fortier, President, and Mr. David A.R. Williams) over the strong dissent of arbitrator Prof. Brigitte Stern. Agreeing with arbitrator Stern’s position that Occidental Petroleum had split its ownership to give a 40% ownership interest to a Chinese company Andes/AEC (Committee decision, para. 204), the ICSID ad hoc Committee whittled down the damages awarded to only reflect the actual 60% ownership of claimant Occidental Petroleum in the assets that Ecuador expropriated. The Committee’s decision significantly brought down the compensation value for the expropriation to the 60% as owned by Occidental Petroleum to US$1.061 Billion (Committee decision, paras. 586 and 590). The Committee treated the Chinese company Andes/AEC’s beneficial ownership of 40% of the expropriated assets as outside the scope of its jurisdiction over covered investors protected under the US-Ecuador BIT.

In issuing its landmark decision, the Committee stressed proscribed limits under the law of investor-State claims; the distinct confined mandate and authority of arbitral tribunals as derived from the creation and consent of States; and the ensuing narrow availability of the investor-State treaty arbitral system only to treaty-covered investors:

“262. The position as regards beneficial ownership is a reflection of a more general principle of international investment law: claimants are only permitted to submit their own claims, held for their own benefit, not those held (be it as nominees, agents or otherwise) on behalf of third parties not protected by the relevant treaty. And tribunals exceed their jurisdiction if they grant compensation to third parties whose investments are not entitled to protection under the relevant instrument.

263.  This subjective limitation of ICSID jurisdiction is a natural consequence of international investment law. Arbitral tribunals are not courts of justice holding unfettered jurisdiction. The role of arbitral tribunals is not to redress torts worldwide. Arbitral tribunals are instruments created by and subject to the consent of States, as formalized in the relevant instrument, and are only empowered to adjudicate disputes between protected investors and consenting States. Other disputes are outside their remit. Investors cannot expand the jurisdiction ratione personae of arbitral tribunals by executing private contracts with third parties.

264. Specifically, protected investors cannot transfer beneficial ownership and control in a protected investment to an unprotected third party, and expect that the arbitral tribunal retains jurisdiction to adjudicate the dispute between the third party and the host State. To hold the contrary would open the floodgates to an uncontrolled expansion of jurisdiction ratione personae, beyond the limits agreed by the States when executing the treaty…..

272. A final caveat: neither the international law principles nor the Committee’s decision imply that investors holding beneficial ownership are left unprotected from interferences by host States. Such investors will enjoy the protection granted under the treaties which benefit their nationality. In the present case, AEC/Andes are entitled to the protection which investors from Bermuda/China enjoy, when investing in Ecuador, under applicable bilateral investment treaties or under general principles of international law. What they are not entitled to – because they are not U.S. nationals or companies – is to the protection offered to U.S. investors investing in Ecuador under the U.S.-Ecuador BIT.” (Italics added.)

The Committee decision in Occidental Petroleum sends a sharp signal that ICSID arbitrators are indeed mindful of the critiques of possible abuse and manipulation of the investor-State arbitration system, through prohibited “treaty-shopping” or investor-claimants’ bad faith or abuse of rights to access compulsory investor-State arbitration, and will exercise strict scrutiny over actual ownership interests, vis-à-vis the nature of beneficial ownership interests, for purposes of determining the appropriate covered investor under the investment treaty claim, and to establish the appropriate quantum of compensation owed to covered investors. It should be stressed, in the first place, that it is not at all an unusual practice for international tribunals to examine the actual beneficial interests present in international claims for economic damage, in order to determine the jurisdictional propriety of an international claim, and also to ensure that it arrives at a correct, just, and equitable award of damages to beneficial vis-à-vis nominal claimants. The Iran-US Claims Tribunal has been particularly liberal in regarding beneficial ownership as a means to equitably permit the initiation of indirect claims in a manner consistent with the objects and purposes of terminating all litigation through the claims settlement arrangements under the Algiers Accords. [See for example, James Saghi et al. v. Iran (Award of 22 January 1993, paras. 24-26; International Technical Products Corporation v. Iran (Award of 28 October 1985, at 233; Foremost Tehran Inc. v. Iran (Award of 11 April 1986)]. The Joint Interim Report of Commissioners in the S.S. “I’m Alone” (Canada v. United States, 30 June 1933 and 5 January 1935) also deemed it relevant to inquire into the beneficial or ultimate ownership of the ship S.S. “I’m Alone” to determine its ultimate effect on the claim for compensation against the United States.  Notably, Article 9 of the International Law Commission’s Draft Articles on Diplomatic Protection also has an expansive rule for determining the State of nationality of a claimant, to include not just a corporation’s place of incorporation or registration, but also allowing for tests of effective control:

“For purposes of the diplomatic protection of a corporation, the State of nationality means the State under whose law the corporation was incorporated. However, when the corporation is controlled by nationals of another State or States and has no substantial business activities in the State of incorporation, and the seat of management and financial control of the corporation are both located in another State, that State shall be regarded as the State of nationality.” (Italics added.)

The Occidental Petroleum ad hoc Committee Decision stands out significantly from other recent cases where arbitral tribunals declined to examine the real beneficial ownership of the investment and its impact on the institution of investment treaty claims. In KT Asia Investment Group BV v. Kazakhstan (Award of 17 October 2013, ICSID Case No. ARB/09/8), for example, while the arbitral tribunal (composed of Prof. Gabrielle Kaufmann-Kohler as President, Ian Glick QC, and Christopher Thomas QC) found that there was ultimately no jurisdiction ratione materiae (“covered investment” under the 2007 Kazakhstan-Netherlands BIT), it nevertheless declined to rule on Kazakhstan’s objections to jurisdiction based on the real beneficial ownership interests of a Kazakh national and alleged abuses of BIT, the Kazakh national’s commission of tax fraud, and the corporate restructuring undertaken by the Kazakh national to create a Dutch company that would enable it to initiate an investor-State claim against Kazakhstan (KT Asia Award, paras. 222-223). The KT Asia arbitral tribunal’s ultimate silence on the legal effect of beneficial ownership was confounding, given that in its recital of facts in the Award, the tribunal held that “[i]t is undisputed that as the ultimate beneficial owner of KT Asia, [Kazakh national] Mr. Ablyazov is funding the present arbitration and that KT Asia has never had any assets other than the shares in BTA and a bank account with a balance of approximately €18,000.” (KT Asia Award, para. 21). Notably, similar objections to jurisdiction on the basis of actual beneficial ownership of the investment have also been raised – and/or similarly ignored, or dismissed outright by arbitral tribunals – such as in Churchill Mining Plc v. Indonesia (Decision on Jurisdiction of 24 February 2014, ICSID Case No. ARB/12/14, paras. 259-266), Planet Mining Pty Limited v. Indonesia (Decision on Jurisdiction of 24 February 2014, ICSID Case No. ARB/12/40, paras. 239-246), Veteran Petroleum Limited v. Russian Federation (Interim Award on Jurisdiction and Admissibility, PCA Case No. AA228, 30 November 2009, paras. 433-492). These arbitral dispositions still resonate the dismissive position of the arbitral tribunal in CSOB v. Slovakia (Decision on Objections to Jurisdiction, 24 May 1999) towards scrutiny of beneficial ownership interests of claimants: “absence of beneficial ownership by a claimant in a claim or the transfer of the economic risk in the outcome of a dispute should not and has not been deemed to affect the standing of a claimant in an ICSID proceeding, regardless whether or not the beneficial owner is a State Party or a private party.” (Decision, para. 32).

The Occidental Petroleum ad hoc Committee Decision restores the much-needed balance that considers the nature of the extraordinary access granted by States to treaty-covered investors enabling them to directly lodge claims against States through compulsory investor-State arbitration, rather than having to seek diplomatic espousal of their claims in international adjudication processes before the International Court of Justice that, historically (see Barcelona Traction and Diallo judgments), has never issued compensation awards of the vast scale and magnitude as those ordinarily rendered by investor-State arbitral tribunals. The current reluctance of other investor-State arbitral tribunals to subject claimants to a searching scrutiny of any actual beneficial ownership interests represented in the arbitration undermines the real significance of States’ consent to investment treaty arbitration, and in turn, detracts from achieving and promoting the genuine equality of parties in international dispute settlement.  In this sense, the decision of the ad hoc Committee in Occidental Petroleum certainly marks a constitutive moment for the rational evolution of the investor-State arbitration system, towards granting jurisdictional access only to the truly accountable and responsible parties for whom States created third-party access through investment treaty claims.

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Geraldo Vidigal says

November 16, 2015

Interesting post Diane. I admit I have been following the evolution of this specific debate only intermittently, but I generally tend to believe that the current system of ISDS has grown too much and become too powerful, with tribunals making decisions and ordering unparallelled amounts in compensation without the kind of checks other international adjudicators are subject to.

On the other hand, reading this decision I find the key passage - the reasoning leading to the conclusion that there was 'manifest excess of powers' in paragraphs 265-268 - to be extremely brief. In particular, the key point that the tribunal applied the wrong law rather than making a wrong assessment of the right law appears to have been made only en passant, and almost by reference to the discussion of the arguments of the parties in paras 48 ff.

Can we interpret this as a move towards ad hoc Committees interpreting their mandate more broadly, as encompassing not only legal form but also substance? Does this mean ad hoc Committees may start acting more like courts of cassation, if not necessarily appeal? This could be a positive move in terms of creating checks on the tribunals, but (as a seasoned arbitrator recently noted), leads to the question of the legitimacy of members of ad hoc committees, which contrary to members of other appellate jurisdictions are chosen single-handedly by the Secretary-General of ICSID.

Diane Desierto says

November 16, 2015

Thanks for the comment, Geraldo. I believe we share different degrees and arcs of concern, largely since we proceed from different structural premises of the investment dispute settlement system.

There are many who frequently assert their belief that ISDS "has grown too much and too powerful", which, in and of itself requires careful clarification. I see nothing extraordinary in States creating the option for their nationals (e.g. investors) to have recourse against other States' expropriatory acts in an impartial and delocalized forum rather than local courts where States hold the home court advantage, rather than subjecting their nationals' massive losses to the vagaries of uncertain diplomatic protection at inter-State levels. Arbitral tribunals are not autonomous entities that derive no authority whatsoever from States - frankly they exist because States permit them to, States extend judicial support to enforce provisional measures and arbitral awards, and States decide to vest them with jurisdiction over treaty-based claims. When arbitral tribunals act in excess de poivre, there are legal remedies inbuilt to check them (e.g. Article 52 of the ICSID Convention, or even Art. V grounds in the 1958 New York Convention for non-ICSID awards). Manifest excess of powers as a ground for annulment under Article 52 is NOT intended as a ground for an ad hoc committee to review an arbitral award de novo and on the merits, but rather to ensure that the arbitral tribunal acted well within the precincts of its delegated authority and mandate from the consent of the parties. If States choose to drop the settled principle of finality of arbitral awards, in favor of replicating a more litigation-based paradigm for international disputes, there will be corollary consequences to this choice. One is there will never be an end to litigation, some States will be empowered to act in morally hazardous ways when they expropriate foreign nationals' investments, and there will be no real gains to be had by any party (State or non-State) from international dispute settlement. Anyone who has ever had to litigate against a State will know how difficult it is in practical terms to obtain evidence, witnesses, etc. given the phalanx of State authority and resources mustered against them.

Of course the policy scenarios are many. Your concern about the appointment of ad hoc committees is a frequent objection raised by those accustomed to more judicial appointments procedures (e.g. WTO, ICJ, etc.). However, it also presupposes that States do not have a hand in nominating their own jurists to the Panel of Arbitrators from whom ICSID draws ad hoc Committee members, or that arbitrators are not subject to rigorous standards for selection to ICSID panels. I can think of some jurisdictions who might not, unlike ICSID, impose on their judges or domestic arbitrators the same strict Article 14 standard under the ICSID Convention (e.g. "persons of high moral character and recognized competence in the fields of law...who may be relied upon to exercise independent judgment. Competence in the field of law shall be of particular importance in the case of persons on the Panel of Arbitrators.").

My main concern is how well and how wisely States choose to retain their control over the mandate and authority they confer on arbitral tribunals to begin with. And on this ground there is indeed much basis for fertile discussion. States constantly have to rethink the margins of what they choose to delegate to arbitral tribunals, and how they choose to hold them accountable within the system of international dispute settlement, in a manner that accords with the greatest interests of States. Determining and reconciling those interests alone requires more judicious even-handedness with our understanding of the strengths and weaknesses of the investor-State arbitral system.

Geraldo Vidigal says

November 17, 2015

I agree with many of your points, and I understand that there are specific factors about foreign investors that can be invoked to justify ISDS. Additionally, especially in the case of large investments, the alternative to ISDS would likely not be domestic litigation but ad hoc arbitration, without the transparency, and consequent accountability, that ISDS provides these days.

What I find problematic, other than the issues that arise out of the same individuals alternately acting as counsel and sitting as arbitrator (pointed out by Philip Sands earlier this year at the ESIL Annual Conference and reproduced in EJIL:Talk!), is that the atomized nature of ISDS is conducive to decisions that focus on particular disputes without much concern for the systemic impact of decisions. I find it difficult not to draw a comparison between this and WTO law, where especially in the early years the Appellate Body went through great pains to check the tendency of panels to consider issues from the narrow perspective of the dispute before them (of course, not everyone approved of this change in perspective). In my view this has little to do with the individuals making the decisions and a lot to do with the form of appointment and the consequent position of adjudicators within the system.